Consequences of interrupted employment careers on early retirement and pension entitlements

Reduced earning capacity pensions are an important welfare state benefit for those who are no longer able to work due to chronic illness. However, the low average pension entitlements are a cause for concern.

Early retirement results in lower overall pensions due to obligatory deductions, often combined with less stable working careers and longer periods of unemployment. The following analysis investigates the consequences of career characteristics for pension entitlements in 2014.

Longitudinal data from the German Pension Insurance records, the “Completed Insurance Biographies 2014” (SUF VVL 2014), are used to study differences between pensioners who had retired early due to ill health and regular old age pensioners in terms of working career stability and the resulting monthly pension payments. Linear regression is used to explore reasons for overall lower pensions for persons with reduced earning capacity.

On average, more old age pensioners had had uninterrupted working careers and they had experienced less unemployment before retirement. These differences explain the major part of the difference between the two kinds of pension entitlements. However, early retirees also often experienced income decline compared to old age pensioners with a similar working career.

Lower reduced earning capacity pension entitlements are a result of income inequality on the labor market and the increasing long-term unemployment.